Okay, let's talk about something that might ruffle a few feathers but is super important to understand: how the wealthy use insurance to minimize their taxes. Now, before you jump to the conclusion that this is some sort of conspiracy theory, it isn’t. That’s a smart fiscal strategy—for those that have the means to do it. But there’s the rub, it’s exacerbating the wealth gap, and that’s where the story gets a bit dark.
In my view, it was conjuring for me—I’ve long been a financial market junkie just by how the world works. I really enjoy going down into the weeds. Sometimes that means learning about the tactics individuals leverage to create whales and shields of capital. It's like drawing a picture with words, but instead of landscapes, I'm painting a portrait of the financial landscape. There’s something interesting about this. The tax advantages of insurance are a stealth cap exec ramce for the rich.
Here’s what that all means. This is because the rich tend to invest in permanent life insurance, not merely for the death benefit, but for the tax advantages it provides. They pay for these polices with after-tax dollars, and the cash value accumulates tax-free. Take a moment to consider that. Unsurprisingly, the average American pays taxes on their investment gains. At the same time, the rich get to grow their money in a tax-free environment.
As one of the richest, most benevolent aspects of insurance for the wealthy, estate planning can be a way to transfer generational wealth. Life insurance is one way to deliver an immediate, lump-sum tax-free payment to the heirs, helping parents equalize inheritance among children fairly. This can be especially helpful when certain heirs are intended to receive inheritance of less valuable assets or business interests than others. It’s how you make sure nobody’s hungry, that everyone gets what’s theirs, and it builds good will and safety amongst the family.
Indexed universal life insurance is a growing tool in their kit.… It connects the cash value growth to a stock market index, providing your client with the opportunity for tax-deferred growth. This allows them to cash in on all the upside of the market while not ever paying taxes on that appreciation in value. It’s as though they were given their own private botanical garden, where their contributions can flourish without any outside distraction.
Finally, of course, are the tax-free withdrawals. They’ll enjoy the ability to withdraw cash from the policy, tax-free. Just ensure that they do not go over the policy’s Accumulated Cost Basis (ACB). It's like having a piggy bank that the taxman can't touch.
Now, you might be thinking, "Okay, but how does this create a wider wealth gap?" So why is it so easy. But the average American taxpayer isn’t privy to these kinds of sophisticated strategies. Their shit is so far beyond getting cracked that they could care less about health insurance double talk and tax dodging. They’re on the hook for paying taxes on what they earn and invest, while the rich are sheltering their fortunes.
Take for example the case of tiny insurers. The law allows single owners to make tax-free profits on those businesses, so long as their principal business is insurance. Without this exemption, companies could build significant tax liability just by building up assets. They may deduct premiums paid on the first $50,000 of benefits for each employee. That amount is not considered income for the employees. It's a win-win for the business owner and their employees, but it's a system that's not available to everyone.
Now don’t get me wrong — insurance isn’t a bad thing. Or better yet, why not all of it? It can be a great part of the toolbox for protecting your family and your assets. When it is used as a tax shelter for the wealthy, it furthers the present-day inequities that plague our society. It lets the wealthy continue to rake in the cash, while the typical taxpayer is left holding the bag.
Equality, fair treatment, I’m all for that. Give a related suggestion I believe that everyone, regardless of race, zip code or background should have equitable opportunity to build wealth and security. When the rules are rigged in favor of the wealthy, it's hard for the average person to get ahead.
So, what’s to be done on the advocacy side? You’d think that would be an easy question to answer! Some tax reformers call for repealing these loopholes. Too many people think we should increase financial literacy. In doing so, more people and communities can reap the benefits of these strategies.
My own theory is that it’s little bit of each. The best way to restore a level playing field is to close the wealthy-friendly tax loopholes. Beyond all that, we need to equip Americans with the information and resources to make informed financial choices for themselves and their families.
Opportunities that I would love to see people apply for. It’s beautiful to watch them become wealthy and fulfill their legacy dreams. I think everyone deserves a fair shot. When the tax system is like that for the rich, it’s an unfair fight for the average American. They find it hard to catch a break right from the start.
At OverTraders.com, we’re passionate about empowering traders and investors of all stripes. At Code for America, we know that everybody deserves access to critical information. This gives them the ability and confidence needed to tackle today’s complex financial markets. That’s the reason we offer detailed analysis, real-time data and comprehensive educational resources to put you in the driver’s seat to make the smartest choices.
So in the end, I remain very hopeful. Together, I am certain we can achieve a more just world where no one’s zip code determines their quality of life. But it’s shit that’s going to take work. It's going to require us to challenge the status quo and demand change. And it's going to require us to be honest about the ways in which our tax system is rigged in favor of the wealthy.
I really hope this has inspired you to think deeply about our Earth and its wonders. It’s a tricky question, to be sure, but an important one to consider. The more we learn about the financial world, the more powerful we become. Equipped with this understanding, we will be better positioned to overcome challenges and create a more positive path forward for us all and our neighborhoods.
